Hopefully, Your Firm Doesn’t Claim a Family Culture

Hopefully, Your Firm Doesn’t Claim a Family Culture

I am a strong believer that company culture is critical in its success. It defines who you are, who you attract, and how you behave. As Jim Collins says, the most important thing is “Who is on the Bus.” However, when talking to many clients and business owners, I often hear that they have a “Family” culture within their organization. I am always perplexed by this answer, but it has become a red flag in my book about the possibility of the organization’s performance.

What Does Family Culture Mean?

Drilling down, it would appear that it means that the organization is nurturing like a family. Mentally they envision a Norman Rockwell painting of everyone happy and getting along. However, most family gatherings are not like that. Rather it starts that way and then someone says something that leads to the usual conflicts arising. I know families where they always invite guests to ensure everyone remains on good behavior.

When I hear family, the first thing I think of is “dysfunctional.” Now everyone is pointing out that only my family is dysfunctional; however, we all have thought our spouses/partners’ families were dysfunctional when we met them because they didn’t behave like ours. But it is not just behavior; there is true dysfunction. As a friend reminded me of at my wedding, at every wedding, there is the equivalent of the “Drunk Uncle.” Let’s consider some of the cast of characters that can appear.

  • The matriach/patriach. They rule. All allegiance is to them. They were paramount in the family’s success, so their “rules” are lived to even when no one can remember how or why the rule came into being. I have seen families lose fortunes following such directives because the world had changed, but all that remained was the rule and not the intent.
  • Favored child. There is always one. They often perform way below par and everyone else, but the parents continue to make excuses for them and support them. They are the ones who believe they are owed everything under their “favored” child status.
  • Second Class Child. The one that was ignored as all the attention got lavished on the favored child. They often work harder, produce more, and die for the family’s success; only they are never taken seriously. Often they become bitter and seek the destruction of all.
  • Drunk Uncle. We all know him/her. Embarrasses everyone, totally inappropriate, starts fights, resented by all, yet tolerated because they are family. However, everyone hopes they will not make the next event.
  • Bitter Sibling. Was overlooked in the succession plan, so bitter forever. Points out how the others received everything on a plate, but they received nothing. They ignore the fact that they have lived off the families’ wealth for the entire lives.
  • The Outcast. Unable to fit in went on their own. Has done well, but resented because they had the strength to walk away and is enjoying life.

If we have a “Family” Culture, then we probably have some of these in the organization.

What is the Problem?

Employees leave organizations because they lose respect for their supervisors.  Why? Their supervisor tolerates “B and C” performers. “A” players want to be surrounded by other “A” players. In a high-performing company, if you don’t meet expectations, you are fired. There is no job security other than through performance.

However, we never fire relatives; we can’t. You are always my father, mother, son, daughter, etc. Thus, claiming a family culture, by definition, requires that you will tolerate poor performance. Knowing that there are “B” players on the team who are never going to leave because of the “family” culture will just driveway more “A” players. This is a negative reinforcement cycle that leads you into a future of mediocre performance as an organization.

My father gave shares in his company to his parents and siblings. When my aunt married someone who didn’t reflect my father’s values, she demanded that my father give him a job in the company as she was a shareholder and it was a “family” business. My father fired all his family members and reminded them that he had them sign undated sale agreements back to him when he gave them their shares. He dated them all and became the sole owner. From then on, he would only hire those that could perform.

So What to Do?

If one looks at successful family businesses, I see that they don’t claim a family culture. They emphasize those family values that they care about. They can say that their values are “nurturing and developing” e.g. they are a “pool” company. Or they can say that they train and develop their people to go on to better things, e.g. a “stream” company. In my father’s case, one of his values was caring. When one of his accounting staff’s husband was diagnosed with terminal cancer he sent her home on full pay until the husband had died. He made sure that the bonuses and gifts he gave made it to the employees’ families. When my father died, over three hundred Africans came from the townships in South Africa to pay their respects at his funeral.

Further, I have noticed that high performing family businesses often have rules, like those below, when a family member wants to join the family business they must:

  • Have worked elsewhere before joining.
  • Apply for an open position
  • Have the requisite experience and qualifications,
  • Be interviewed and selected by non-family members.
  • Report to non-family members and stepping over the chain of command to family members higher up can be a termination event.
  • Realize they will be fired for nonperformance. If they are, they are still in the “family,” just not in the company.

So if you want a culture of performance, don’t say you have a family culture. Focus on what part of the “family” culture you want to emphasize and say that.

Copyright (c) 2021, Marc A Borrelli

 

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Who is your Core Customer?

In working with many clients on improving their business and developing a growth model, we soon get into the issue of their “Core Customer.” I have realized that many have not given this much thought and cannot easily define their “Core Customer.” Your Core Customer is the customer you are targeting, the customer that is preferred, and the one that your marketing and sales efforts are focused on. A Core Customer has the following attributes:

  • A real person with wants, needs, and fears.
  • Will buy for optimal profit.
  • Has an unique online identity and behavior.
  • Pays on time, loyal, and refers others.
  • Exists today among your customers

Not knowing your Core Customer is not a terrible problem, as we can quickly work through a session to put a definition in place. However, a more complicated issue is knowing their Core Customer but unable to define their “Economic Engine,” or profitability per customer. Lack of good data is always a severe problem! If you can’t measure something, then your performance is purely an assumption, and down that road is chaos.

Profit per Customer

If you don’t know your profit per customer, the customer you consider your “Core Customer” may generate sub-par profits pulling down the company’s performance. During a recent conversation, a CEO told me their metric was revenue per employee. While that would generate top-line revenue, it does nothing for profit, efficient customer targeting and marketing, or market differentiation. The business adage, “We are losing money on each item, but will make it up on volume,” seems to be the driving force.

Many companies I have worked with cannot tell me the profitability per customer and so work on the assumption that they are performing well, but cannot understand why they cannot scale and have profit and cashflow issues. Also, often their data is corrupted by the “Flaw of Averages.” So to paraphrase the proverb, “First get your data.” Sometimes getting good data on project costs is difficult, but without there cannot be:

  • Knowledge of performance;
  • Plans for improvement;
  • Measurement of improvement.

And “Hope is not a strategy.”

Select the Right Core Customer

Once we have data showing your Core Customer’s profitability, we can determine if they generate optimal profit. Since a requirement of a Core Customer, as mentioned above, if your Core Customer is not generating optimal profit, then there are one of two choices:

  1. Change your economic model so that they do, or
  2. Change your Core Customer.

When examining the data, many companies have found that the companies they were targeting as their “Core Customers” were their less profitable customers and ones that everyone in the market was fighting over. Targeting a different segment of customers that generated optimal profit could increase its profitability and differentiate itself from its competition, a great “Blue Ocean” strategy.

Lake Truck Lines, a Gravitas client, was focused on large customers. However, when analyzing its data, Lake Truck Lines realized that everyone was targeting those customers so there was pricing pressure and low margins. By make mid-sized customers its Core Customer, the company was able to operate with less competition and generate the optimal profit per customer. Similarly with Build Direct, focusing on young women seeking to do DIY, it was able to realize a much higher margin and operate in “Blue Ocean” waters compared to when it was focused on supplying general contractors.

The time spent analyzing your clients, their profitability, and your Blue Ocean possibilities can result in you operating at higher margins with less competition.

Profit / X

I have discussed the “Economic Engine” before, but it is the concept of “Profit/X,” Profit/X is the crucial part of your strategy, and it must:

  • Tightly aligns with your BHAG®
  • Be the fundamental economic engine of your business
  • Be a single overarching KPI to scale your business
  • It must impact revenue while controlling cost.
  • More X must be desirable.
  • It must be unique within the industry – you have to differentiate yourself from your competition.

What is critical is finding a Profit/X that is unique within your industry. If you choose the same Profit/X as everyone else, you are all competing on the same drivers, and you cannot differentiate yourself from your competition. Having identified our Core Customer, the appropriate Profit/X can be identified. Picking the wrong Profit/X given your Core Customer again will lead to sub-optimal results. These two concepts are interconnected and for you to achieve the best results, you need to determine both and have them connected.

Having the Right Profit/X

If your Profit/X is defined as profit per employee, you have only three ways to achieve this: increase the price, improve employee performance or cut the product’s quality. Since price should be driven by value creation, not employee profitability, raising prices may be difficult. We do not want to cut value delivery, and driving employees harder is no recipe for success. Thus a better metric may be profit per customer.

With customer size, if you are servicing large customers it may require longer larger projects compared to mid-sized companies. If mid-sized companies have more set up and administrative costs then your Profit/X must be different between the two.

There are many examples of Profit/X from Southwest Airlines’ profit per plane to a dry cleaner who measured it by profit per delivery truck. The key is to find the one that drives your business and will also differentiate yourself.

Conclusion

Many CEOs and Business Owners are salespeople and are not interested in digging into the financials and getting to the data I have discussed above. However, the effort is well worth it, as once you have a clear understanding of where you are, you can:

  • Target marketing towards your Core Customer;
  • Differentiate yourself from your competition;
  • Ensure that all projects, services, or products meeting your Profit/X to ensure profitability; and 
  • Position yourself for growth and profitability. 

Get your CFO, your team, and a coach and spend a day or two to determine the ideal results. The payoff will be huge.

 

Copyright (c) 2021 Marc A. Borrelli

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

Last week saw the birth and collapse of the European Super League (ESL). Living in Atlanta, to me, the defeat was on a par of the Falcon’s 2017 Superbowl and Greg Norman’s 1986 Masters. On Sunday evening, there was the announcement of the formation of the ESL, comprising 12 “founding clubs” from England, Spain, and Italy. Three other unnamed clubs were soon to join, along with another five teams that would qualify annually for the 20-team competition. Within 48 hours, it was dead!

The announcement of the ESL was accompanied by a promise to “deliver excitement and drama never seen before in football,” and did they deliver!

Why was the ESL formed?

Why? Simply, MONEY. The fifteen founding clubs were guaranteed a place every year with no messy football stuff like qualifying and relegation! The teams would capture a larger share of the revenues with less risk. Expectations were that broadcasting rights might generate €4bn a year, nearly double the €2.4bn brought in by the Champions League in the 2018-19 season. 

As Martin Baumann put it, “We can sell just about anything to the Europeans. Why not our hyper capitalistic cartel-based pro sports system?” That sentiment seems very popular on this side of the Atlantic. Many other commentators pointed out that the owners sought profits before tradition, financial opportunities before culture, and self-interest before communal identity. The ESL was the logical outcome of the increasing commercialization of football and powerful few’s desire for monopolistic control. To enable the ESL, J.P. Morgan underwrote its formation with a $4 billion line of credit. 

While I like capitalism, I find it interesting the claim that this is capitalism. So saying ignores a couple of the mainstays of capitalism – no monopolies or cartels and creative destruction. The owners were not imposing an American capitalistic system on football; they sought to create an American-style cartel to reduce risk and transfer more money to themselves. This has just been done with F1 under the ownership of Liberty Media, turning the ten existing teams from car manufacturers into holders of very valuable franchise charters. Of course, technology development will slow, and the product quality fall. But we can’t let that get in the way of making money.

American sports competitions, especially the major leagues, are all effective money-producing cartels. Professional sports leagues in the United States are monopoly-like structures that ensure that the riches are spread evenly among a self-selected group. The teams stay in the league no matter how they perform. So much for the American ideal of meritocracy! 

The only economic competition they face is from rival leagues; that is why the U.S. system is a century-old marketplace of rival sports leagues. The combination of less risk and less competition for talent produces higher profits for owners. According to a ranking last year by Forbes magazine, forty-three of the world’s 50 most valuable sports teams are American – aren’t cartels wonderful! Such a structure has several results:

  • “Brand value” is not necessarily tied to on-field success. The “worst teams” in one season get the best players through draft picks the following year. 
  • It provides an inferior product, as I have discussed before. Guaranteed a place in the league means there is no need to invest in the team and deliver a good product for the fans. Recognition that the product is inferior is reflected in U.S. sports capturing a smaller share of the global viewing audience each year. 
  • It delivers more money to the billionaire owners, who theoretically have invested in the clubs. In every American sport, an inferior on-field product isn’t a reason for billionaire owners to make less money, e.g., Tampa Bay Buccanneers. The Bucs, I believe, have the worst record of any team in the NFL, even though they have two Super Bowl titles – 278-429-1. With such a record, they would have probably been relegated in European sports and no chance at any championship.

For those unfamiliar with relegation, unlike American teams, European sides play in open leagues, where the three poorest performers get demoted to a lower tier, with stingier broadcasting and sponsorship deals. The three top performers in the lower leagues get promoted to a high league reaping greater rewards. Club owners thus gamble on making it to the top, investing generously at the expense of profits.

The European model is genuinely a capitalistic one where owners take risks and invest for a potential reward. Creative destruction is evident: between 1992 and 2014, there were 45 insolvencies in the top three tiers of English football, 40 in France and 30 in Germany. 

So why did the ESL collapse? 

I believe it was because of hubris. Through hubris, the founders ignored the sport’s business model and Ben Horowitz’s sage advice, “Take care of the People, the Products, and the Profits— IN THAT ORDER.” 

Hubris

Hubris is a terrible thing and causes many failures in life and business. Only hubris can cause a few rich people to come up with an idea that generates such visceral and universal hatred, or put another way, Never underestimate the incompetence of people.” The hubris of the American owners that they could easily impose the U.S. system on European clubs showed that they were willfully ignorant of an alien culture.

Value Creation

Value creation is about “the job to be done” for the customer. The league claimed it would be an exhibition of elite football. However, with no qualification, the teams would not have had to try very hard and thus reduce the value of the “job to be done.” However, even more concerning was that the league’s criteria were not based on being the best in Europe but merely the richest. Once a world power, Arsenal is barely one of the best in England and just a bougie to Newcastle United. Arsenal currently sits ninth in the Premier League table, out of reach of Champions League qualification, and likely to miss out on the less lucrative Europa League as well. Choosing the clubs by the wealth of the owners killed any pretense at value creation.

Marketing

The key to marketing is delivering on your brand promise. The brand promise in European sports is the promise of the club’s success. The basic unit is the club in European sports, which tends to be much older and more locally rooted than any franchise and far more fervently followed. Many clubs are over a century old and ripple with local associations and mythologies. For those who want a greater understanding, I would suggest watching Sunderland Til I Die.

Not only is the club the basic unit, but there is a “holy trinity” in a football club, the fans, the players, and the manager. The owners are there to invest and collect profits. Unlike in the U.S., when a team wins a championship, the owners are never seen lifting the trophy, only the players and the managers.

Sales

The key to sales is to know your core customer, the FANS. The fans were not amused, to put it bluntly. Unlike peripatetic American sports fans, English football clubs’ fans are even more zealous and less forgiving. The Glazers, Stan Kroenke, and John Henry were pretty much despised by the fans of Manchester United, Arsenal, and Liverpool, respectively, before the ESL. If they were unaware of this, the fans that welcomed the Glazers to Manchester chanting “Die, Glazers, die!” should have been a hint. The ESL announcement only made things worse. Liverpool fans were burning effigies of John Henry outside Anfield. A banner outside Old Trafford read, “Created by the poor, stolen by the rich.” A YouGov poll found that 79% of British football fans opposed the Super League, 68% of them “strongly.”

There have been massive protests by Chelsea, Liverpool, Arsenal, and United fans at Stamford Bridge, Anfield, The Emirates, the Carrington training ground, and Old Trafford within the past 5 days. All the fans have been complaining about the money taken out of clubs rather than investing in them. Opposition was fiercer still among fans of clubs outside the ESL, some of whom burned Liverpool shirts. However, American billionaires excel at ignoring public outrage. Kroenke and the Glazer family might’ve waited out the protests until kingdom come. However, the rest of the founders abandoning the ESL gave them no choice.

Value Delivery

The key to value delivery is keeping the customer satisfied which in European sports is RIVALRY. The rivalry between teams is local, not leagues as in the U.S. Liverpool’s main rival is neither of the Manchester teams but Everton, a mile from Anfield. The ESL would have removed these rivalries. Further, ESL was not designed with these in mind, but for millions of foreign fans, in Asia and America who care less about such details. In European football, this was heresy. But overall, the ESL would have stopped the key rivalries that make European football what it is and thus reduced value delivery.

The Outcome

There were apologies all around. John Henry issued a groveling apology to Liverpool’s fans: “I’m sorry, and I alone am responsible.” This is something I don’t any U.S. fan has heard from an owner. Also, JP Morgan has apologized, which shows how much it has realized that its role might damage its chances of getting business in Europe. However, apologies are the least of the owners’ issues as hubris takes its toll. The speedy collapse presents an opportunity for the wider community [members of the Premier League] to drive a harder bargain during the auction of a new round of Premier League broadcasting rights. The result is that the ESL founders may receive a small cut this year.

However, the real threat is regulation. Boris Johnson, Britain’s populist prime minister, read the tea leaves and thus vowed to “do everything I can to give this ludicrous plan a straight red [card].” Oliver Dowden, Britain’s sports minister, wants to examine everything to stop the new league, from competition law to governance reform. His words, “Owners should remember that they are only temporary custodians of their clubs; they forget fans at their peril,” should be a stark warning. Also, the British government launched a wide-ranging review into how football is run this run. There is pressure for British clubs to adopt the German community-ownership model with fans owning 51 percent. While some point out that fan ownership did not dissuade Barcelona and Real Madrid from joining, the Spanish and Italian leagues’ financial health is more impoverished than England’s.

Who says football is boring?

 

Copyright (c) 2021 Marc A. Borrelli

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Every business owner I have ever known, has sought to sell their business at the top of the market. I think this is part of the movement where many are in a constant quest to outdo others. While conceptually I understand this desire, these owners should heed the voices of some sages.

Daniel Kahneman’, “The average investor’s return is significantly lower than the market indices due primarily to market timing.” 

Warren Buffett, “Trying to time the market is a fool’s game.”

Baron Rothschild, “You can have the top 20% and the bottom 20%; I will take the 80% in the middle.”

 

What it takes to Sell at the Top of the Market

If you are determined to sell at the top and are ready to step aside at any time, the only concern is timing. However, if you have other timing considerations, e.g., retire when my business is worth $X, step aside when I am 65, then things are far more complicated.

For the market to be at the top when you reach some predetermine criteria, you need to ensure that the entire economy collaborates with you. To do this, I expect you would need to have the ear of: 

  • the President, 
  • the majority of Congress, 
  • the Chair of the Federal Reserve, the Secretary of the Treasury,  
  • the President of the European Central Bank, 
  • the German Chancellor, 
  • the President of France, 
  • the President of Russia, 
  • the President of the People’s Republic of China, 
  • the heads of the People’s Bank of China, and
  • the leaders of all the leading investment banks and hedge funds worldwide, to name a few. 

Not only would you need their ear, but you would have to persuade them that collaborating with you is in their best interests as well. Furthermore, many of these people would want something in return for a favor, and most of the people I have spoken with would be able to afford the price Vladimir Putin would expect. Finally, I have found any scheme where only one person knows of it but requires many people to ensure its success is bound to fail.

As a result, I would say that trying to sell at the top is a fool’s errand and one that should be abandoned.

 

A Contrarian View

Some have argued that selling at the bottom of the market makes more sense. The rationale is that the business owner will reinvest those assets into other assets whenever they sell their company. Thus if you want to ensure continued wealth accumulation, one should do it at the bottom of the market rather than the top.

To examine this theory, I did a simple analysis. I reviewed four dates and the market conditions. I looked at the Russell 2000 Price Earnings Ratio for those dates and indexed them with the 2000 Price Earnings Ration as the base = 100. Assuming that enterprise value (EV) to EBITDA ratios followed the Russell 2000’s PER, the EV/EBITDA ratio in 2000 was 5x, and the company had an EBITDA of $1 million in each year before the sale, the results are as follows:

Date Market Conditions Russell 2000 PER (Indexed) EV / EBITDA Multiple Proceeds ($k)
12/31/2000 After the Top of the market 100.0 5.0 $5,000
12/31/2005 Near the top of the market 58.6 2.9      $2,929
12/31/2010 Emerging from a recession 52.6 2.6 $2,631
12/31/2015 Middle of a bull market 74.7 3.7 $3,734

I then made a few more simple assumptions:

  • Transaction costs to be 30% comprising intermediary and legal fees of 10% and taxes of 20%.
  • The proceeds are invested in two funds, VFIAX – Vanguard 500 Index Fund Admiral Shares and VBMFX – Vanguard Total Bond Market Index Fund Investor Shares as proxies for a general stock and bond market investment.
  • The allocation is 70% into VFIAX and 30% into VBMFX.
  • Any funds withdrawn and any distributions are ignored as they would be the same for both funds.

Below is a chart of the S&P 500 from December 31, 2000, to December 31, 2020 to show the market’s performance over the period.

Source: Yahoo Finance

Following the investments as described above after five, ten and fifteen years the returns were:

Date Initial Value ($k) After 5 yrs ($k) Return (%) After 10 yrs ($k) Return (%) After 15 years ($k) Return (%)
12/31/2000 5,000 4,822 -3.6 4,930 -1.4 7,027 40.5
12/31/2005 2,929 2,993 2.2 4,292 46.5 5,414 84.8
12/31/2010 2,631 3,790 44.0 4,786 81.9    
12/31/2015 3,734 4,643 24.3        

 

So as it can be seen, while selling at the top, provided the greatest wealth after fifteen years, interesting the difference over 10 years was less than 3% between selling at the top and selling just after the bottom. The other points are somewhere in between. Therefore, selling at the top is not the conclusive answer we expected.

 

So what to do?

What I have always advised clients is to build a business that is attractive to buyers and can be sold. The key is to create your own redundancy, so that you can sell it, stay in a non-executive capacity and effectively “coupon clip,” or pass it on to your children or employees. You have many options and if someone comes along and offers you “silly” money, take it. But don’t worry about the “Top of the Market.”

If you want to know if your business is sellable, complete this questionnaire, and if you want help building a sellable business, contact me.

Copyright (c) 2021, Marc A. Borrelli

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Passion. Your employees are passionate about the “X” and excited about increasing it.
Empowerment. Your employees are empowered to make decisions to ensure the baseline Profi/X is met.
Drive. It drives behavior to generate profit and growth.
Discipline. It provides the financial discipline to ensure that the organization remains profitable as it grows.

Thus is it is your Economic Engine that will enable profitable growth.

Many people look for a quick answer in determining Profit/X, but there is no quick answer. It is an iterative process that will get there, but no something you necessarily come up with on the first try.

Profit can be:

  • Gross Profit,
  • Operating Profit,
  • Net Profit,
  • Gross Margin,
  • Operating Margin, or
  • Net Margin,

to name a few.

“X” is very variable and can be:

  • “Product/Service,”
  • Customer,
  • Invoice,
  • lb,
  • pallet,
  • truckload, or
  • plane.

For a better understanding of Profit/X, my video below may help explain it better.

Profit/X

It is well worth your time to develop your Profit/X and get your employees to understand it and embrace it. The discipline it provides combined with the drive and empowerment it delivers makes a very strong economic engine and ensures continued profitability through your growth.

 

Copyright (c) 2021 Marc A. Borrelli

 

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